Secretary-General

Remarks by Angel Gurría, OECD Secretary-General, delivered at the interactive session with Indian industrialists to discuss the global economic situation, the outlook for the Indian economy and the OECD-India cooperation.

New Delhi, Monday 15 October 2012

(As prepared for delivery)

Ladies and Gentlemen,

It is a pleasure to participate in this discussion with you, representatives of India’s business sector. Many thanks to the Confederation of Indian Industry for organising this event. Let me focus my remarks on the global economic situation and elaborate on India’s key challenges, including on improving India’s business environment.

The state of the global economy

The global economy has weakened considerably. Growth has been adversely impacted by the unresolved euro area crisis alongside a marked slowdown in the emerging-market economies. Trade flows have slowed. And business and consumer confidence is waning, particularly in the euro area.

The loss of momentum is likely to persist during the second half of this year. The euro area will remain in recession, the United States is projected to enjoy somewhat stronger growth, and in China, growth is expected to pick up modestly to between 7.5 to 8%. The latest OECD assessment suggests that growth in the G7 countries will weaken from 0.7% in the first half of 2012 to 0.3% in the second half of the year, with the euro area effectively remaining in recession throughout the period.

Labour markets are the most troubling aspect of the global economic outlook. The recent weakness is already translating into weaker jobs prospects. To put this in perspective, let’s bear in mind that our latest OECD Employment Outlook projects the unemployment rate to remain around 8% in the OECD area through the end of 2013. There are already 48 million people unemployed in OECD countries, and about 14 million jobs would need to be created only to bring the employment ratio back to pre-crisis levels.

How should policy respond?

Now, policy action is needed to restore confidence, primarily but not exclusively in Europe, and put the economic recovery onto a sustainable growth path. Many countries will face a long period of adjustment to absorb legacies of the crisis, particularly in terms of high unemployment, excess capacity and large fiscal imbalances. With limited room for fiscal and monetary manoeuvre, at least in the OECD countries, structural reform is the only way out.

Implementing bold structural reforms, such as those promoted in the context of the G20, could improve significantly the global long-term outlook. By structural reforms, I mean reforms in the areas of regulation, education, innovation, labour markets, taxation, governance, and in many other areas that are so important for growth and development.

New sources of economic growth

In today’s world, productivity is bound to become the main engine of growth. And how do we increase productivity? By investing in education, skills, innovation. And by investing in knowledge-based assets, such as brands, organisational know-how and various forms of intellectual property. Knowledge is our most valued asset!

Another powerful driver of growth is green growth. Green growth is about fostering innovation and creating incentives for greater efficiency in the use of resources and natural assets. Green growth creates new markets by stimulating demand for green technologies, goods, and services. Green growth also creates new job opportunities. Green growth may also support fiscal consolidation through, for instance, removing fuel subsidies and increasing revenues through the pricing of pollution.

Indeed, policies do matter, as we can see in the example of India.

Economic situation in India

Over two decades, India implemented wide-ranging reforms that opened up the economy to the world, led to the dismantling of the old licensing system and introduced competition into a number of sectors that had previously been dominated by public monopolies.

This decisive action has helped the Indian economy narrow the gap in living standards with advanced economies. Convergence accelerated in the 2000s as growth averaged over 8% a year, one of the strongest performances in the world, supported by further reforms.

But India needs to continue to address important obstacles to stronger growth. Following the 2009 global downturn, the Indian economy enjoyed a recovery. However, growth began to fade again in 2011. GDP rose by 6.5% in 2011-12, the slowest annual growth in almost a decade and has continued to weaken more recently. This is a source of concern, which can be explained partly by the global slowdown, but also by the strains caused by rapid growth in energy, natural resources and skills. To boost productivity and promote the development of the formal sector, steps should be taken to strengthen the business environment and support the introduction of new technology, including by fostering competition, further reducing international trade and investment barriers and improving corporate and public governance. Steps to reform the financial sector can also support productivity gains by facilitating the entry of new enterprises and improving the efficiency of capital.

Improving the functioning of the labour market is essential to long-term growth but also for reducing inequalities. While the Indian economy has performed well, informal employment remains pervasive -- at approximately 85% of total employment. The strong segmentation between formal and informal jobs represents an important barrier to achieving inclusive growth and depresses productivity. Therefore, India should encourage job creation in the formal sector, for example by reducing the administrative burden for dismissal faced by large firms.

Improved education is also needed to ensure that India’s demographic dividend is not squandered and to promote inclusive economic development. Providing access to quality education is fundamental to the country’s long-term economic success as well as for ensuring equal opportunities for all. With elementary education now compulsory, enrollmnt continues to climb and should rise further.

Improving the quality in education also remains a key priority for India. The participation of two Indian states – Himachal Pradesh and Tamil Nadu –in the 2009 Programme for International Student Assessment (PISA), which assesses the performance of 15-year old students in reading, mathematics and science, revealed that in all three subjects the performance of students in both states was well below the average of OECD countries and even behind other participating emerging-market economies. Over 80% of students in the two states performed below the baseline level of proficiency in the three areas tested. Clearly, India should continue with current programmes that seek to raise participation in secondary education and to improve learning outcomes.

All this requires a holistic approach to avoid that bottlenecks in one area block progress in others. It is high time for India to go more structural, more social, more institutional and more green.

Ladies and Gentlemen,

If implemented, these reforms would play a key role in boosting India’s growth potential by strengthening incentives for firms to invest, innovate, increase productivity and ultimately create more jobs in the formal sector.

The OECD looks forward to deepen its relationship with India to contribute to a stronger, cleaner and fairer Indian economy.